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French Doctor Arrested on Insider Trading Charges

By Thomas Kaplan November 2, 2010 2:30 pmNovember 2, 2010 2:30 pm

By THOMAS KAPLAN

7:57 p.m. | Updated A prominent French doctor has been arrested on criminal fraud charges that accused him of tipping off a hedge fund manager about setbacks in a clinical drug trial that had not yet been made public, federal authorities said Tuesday.

The manager avoided $30 million in losses by selling his entire stake in Human Genome Sciences before it announced the setbacks in January 2008, the authorities said.

Dr. Benhamou, a liver disease expert whose research has been widely published in medical journals, was also working at the time as a paid consultant to hedge funds and other investors, the authorities said.

They did not identify the manager or his firm, but a person close to the firm said it was FrontPoint Partners, which is being spun off by Morgan Stanley. The firm has not been charged with wrongdoing.

FrontPoint issued a brief statement saying it was “cooperating fully with this investigation.” It also said it had placed one of its managers, Dr. Chip Skowron, on leave pending the outcome of the investigation.

In his position as a member of the steering committee for a clinical trial of the drug Albuferon, Dr. Benhamou learned in late 2007 that two participants in the trial had developed lung disease, and one of them had died, according to the civil and criminal complaints filed in United States District Court for the Southern District of New York.

Dr. Benhamou, according to the complaints, passed word of the setbacks to a portfolio manager with whom he had a consulting relationship. The manager, described in the complaints as a managing director of a investment bank who co-managed six health care hedge funds, then began selling some of the shares the funds held in Human Genome Sciences.

On Jan. 22, 2008, during a telephone call with Dr. Benhamou, the portfolio manager sent an instant message to a trader instructing him to sell the remaining shares the fund held in Human Genome Sciences, according to the complaints. The next day, the drug company announced that it had reduced the dosage for some participants in the clinical trial because of safety concerns, and its shares plummeted 44 percent, to $5.62, from $10.02.

The hedge funds saved approximately $30 million by selling its shares in advance of the announcement by Human Genome Sciences, the complaints said.

Dr. Benhamou, 50, of Neuilly-sur-Seine, an affluent Paris suburb, was detained by F.B.I. agents on Monday as he attended a conference in Boston. He appeared Tuesday in federal court in Boston, where the authorities announced their charges. He will be transported to New York, where he is expected to be arraigned. His lawyer, Joseph H. Zwicker, declined to comment.

Human Genome Sciences, meanwhile, no longer employs Dr. Benhamou as a consultant, said Jerry Parrott, a spokesman for the drug maker. “We cooperated fully with the S.E.C. investigation and have no comment beyond that,” he said.

The drug in question, which has since been branded as Zalbin, has been abandoned. The Food and Drug Administration raised concerns about it earlier this year, and Human Genome Sciences and its collaborator on the drug, Novartis, said in October that they would not develop it further.